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Why Cruise Stocks Keep Going Down

Motley Fool - Fri May 20, 2022

What happened

Close, but no cigar.

In early trading Friday, stock markets attempted to make a comeback and end a down week on an up note. But after turning briefly green in the morning hours, here we are in the late afternoon -- 3 p.m. ET, an hour from the closing bell -- and all the major stock indices are in the red again.

Cruise line stocks number among the bigger decliners today, with shares of Carnival(NYSE: CCL) off 5.4%, Royal Caribbean(NYSE: RCL) falling 5.6%, and Norwegian Cruise Line Holdings(NYSE: NCLH) leading the sector lower with a 6% loss.

Young girl looks pensive while leaning over railing on a cruise ship.

Image source: Getty Images.

So what

What's behind today's cruise stock pessimism? From a big picture perspective, financial news websites are full of headlines warning of recession risk, and reporting that the S&P 500 just officially crossed the line into bear market territory -- down 20% from its high point hit on Dec. 27, 2021. That's certainly not helping cruise stocks go up today.

We're also probably seeing the tail end effect of Truist bank cutting its price targets on each of Carnival, Royal Caribbean, and Norwegian Cruise Line stocks yesterday. As The Fly reports, Truist has only a neutral rating on each of Royal Caribbean and Norwegian Cruise Line -- and rates Carnival stock an out and out sell. According to the banker, cruise companies may be enjoying some success in attracting customers with discounted rates and special offers -- but the rising cost of food, fuel, and other inflation-sensitive input costs means that the prices on offer may not be high enough to earn the companies any profit.

That revelation was enough to push two of the three major cruise line stocks lower Thursday. Norwegian Cruise Line managed to eke out a small win yesterday -- but it's making up for lost time as it falls even more than its peers today.

Now what

And now here's the kicker: Food and fuel aren't the only things getting more expensive for cruise lines. Debt is getting more expensive, too.

In case you missed it, the Federal Reserve hiked interest rates by half a percentage point earlier this month -- its biggest hike in two decades -- and strongly hinted at plans to hike rates at least that much twice more before the year is out. This should concern cruise stock investors because, as I pointed out earlier this week, since the COVID-19 pandemic began two years ago, Carnival has had to load up its balance sheet with $20 billion in new debt, Royal Caribbean with $11 billion, and Norwegian Cruise with $6.5 billion.

The higher interest rates go, the more it's going to cost these companies to service their debt. And when combined with all the other inflationary costs these companies must now absorb, there's the potential this will push out the date for their return to profitability -- even further than it's already been pushed out. Long story short, there's little good news in cruise-land right now.

It's no wonder investors are selling.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Carnival. The Motley Fool has a disclosure policy.

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